There is no reason why the proportion of inventions that are unworkable on economic grounds should increase as the total number of inventions increases. But there are good reasons why the proportion of multiple and substitute inventions should increase when the total increases. Every age presents its inventors with certain technical problems and, as the number of people engaged in inventive activities increases, the number of those who work on the same problems will increase. It is almost inevitable that an increasing percentage of the solutions will overlap.262

Another loss is likely to occur between the shelf of usable inventions and the shop or factory where they are supposed to be put to actual work. Firms, at any one time have limited financial, entrepreneurial, and managerial resources; if there are more inventions to choose from, this does not mean that more inventions will be reduced to actual use in production. Busy management cannot get around to doing all the things that might be done. On the other hand, perhaps when the innovators can be more selective the quality of inventions actually applied may be improved. And the emergence of new firms may be stimulated when people of entrepreneurial ability find that promising inventions remain unused.

Thus, with the proportions of multiple and substitute inventions increased, and the proportion of usable inventions actually introduced somewhat reduced, we must indicate that ƒ will be smaller than e. We assume, for purposes of illustration, that the 0.5-percent increase in the number of usable inventions made and developed will be converted into an 0.3-percent increase in the number of inventions put to actual use in production (i. e., f=0.3).

(7) Now the stage is reached where the new technology at work can raise the productivity of resources. The magnitude of the contribution which improved products and new products make to the national product cannot be estimated, as was pointed out before. But the contribution of cost-reducing inventions can be estimated. For the sake of simplicity, we are now thinking only in terms of cost reductions; that is, in terms of increased output per unit of resources. The new inventions developed and put to work will not affect productivity in all industries, let alone in all sectors of the economy. The effects will be concentrated in a few industries and, within these industries, in the production of some particular goods or services. The economies achieved may be very impressive in some of these instances, but their significance in the economy as a whole will, of necessity, be modest. Even a doubling of output per worker in the production of a few products is apt to show itself as a small change in the decimals of the growth rate of "average productivity" in the

economy.

Let us assume that the annual increase of average productivity would have been 2 percent; that a large part of it is due to the increase in capital per worker; that the bulk of the increase that is attributable to technological progress is not related to patentable inventions; and that one-tenth of the total growth of productivity, 0.2 percent, can be attributed to patented inventions (bearing in mind that this figure is only a figment of our imagination). The increase of 0.3 percent in

If it is assumed that both the proportion of unworkable inventions and the proportion of unexpectedly good inventions are approximately unchanged when inventive activity is stepped up, and if it is assumed that the "open problems" of the time are limited, the proportion of multiple and substitute inventions must of necessity increase as inventive activity is intensified.

patented inventions applied in actual production, if instrumental in enhancing average productivity at the same rate as the other patented inventions, would then contribute an 0.06-percent increase in average productivity (g).

(8) What would this mean in terms of total national product? This will depend on its current size, of course, and on the possibility of reemploying the economized resources in equally productive pursuits. Such a possibility may not exist. The productive factors displaced in one use may be employable elsewhere, if at all, only with reduced compensation because of reduced "value productivity." Moreover, account may have to be taken of an accelerated obsolescence of capital, of transfer losses of capital and transfer costs of labor, of losses in labor skills, etc.

For reasons such as these, we shall assume that the national product will increase by only 0.04 percent (h). If its size had been $300 billion-with this assumption we are, I am afraid, coming nearer to the United States national income than to that of any other country-its induced increase would be $120 million.

(9) We have reached now the item which is negative by hypothesis, since the whole incentive theory is based on it: the restriction of output in the 17th year of the patent monopoly. Here we encounter a timing problem: during the first 16 years after the 1-year extension of the patent grant becomes effective, the Nation would not incur the costs of additional restrictions (assuming that the terms of patents already issued would not be lengthened). Only after the transition period is over will the losses due to restrictions become effective. These restrictions would apply, of course, not merely to inventions made under the stimulus of the extension of the duration of patents (or under the stimulus of patents in general), but to all patented inventions in On the other hand, the fact that only a small percentage of inventions remain usable for the entire life of the patent limits considerably the size of the output loss during the added year of protection.

use.

The assumption we make for the output loss due to the restrictions in the extra year will decide whether the total calculation comes out with a net gain for society or with a net loss. Despite the repeated insistence that these are not "estimates" but arbitrary assumptions, the danger of offending sensibilities is great; it may be averted by making two alternative assumptions: If the loss of products due to the restricted use of patented technology in the 17th year of the patent grant is one-fiftieth of 1 percent of the national product, it would amount to $60 million (or one-half of the increase credited to the extension of the grant); if the loss is one-twentieth of 1 percent, it would be $150 million (or a little more than the increase credited to the extension). It should be remembered that this negative factor (i) reflects only the cost of restrictions, not the other cost items, such as the cost of invention.

Summing up this lengthy exercise in "imaginary numbers," it may first be noted that only positive numbers were chosen for all coefficients from a to h: 4.0, 3.0, 2.5, 0.8, 0.5, 0.3, 0.06, 0.04 percent, respectively. A negative number, or zero, for a, though not unlikely at all, would have ended the story in its first chapter. A zero value for c would appear quite plausible, even with positive a and b. Another zero might be unavoidable at certain times for d. That e may easily be negative during transition periods has been pointed out,

and ƒ could be zero even if all the preceding values were positive. The remaining two "beneficial" factors, g and h, are more likely to be positive if all others are.

One important moral of the argument is that no one who thinks it through can be very sanguine concerning the effects to be expected in "reality"; and, certainly, no one can be at all sure about any of these matters.

L. INTRODUCING OR ABOLISHING COMPULSORY LICENSING

Many kinds of patent reform can be evaluated by this type of analysis. Not that numerical results can be obtained, but even "educated guesses" on the basis of intelligent impressions would be a great advance in the development of rational economic policy and of the appropriate legislative changes. This may be illustrated by some reflections on the merits and demerits of the proposal for compulsory licensing for all patents.

Compulsory licensing would probably reduce the incentive effects of a patent system, but increase the rate of utilization of the patented techniques that have proven themselves commercially successful. If the former is true, the latter must be true all the more, since it is only the expectation of an increased rate of utilization under compulsory licensing which reduces the returns expected by the owners of patents. If the owners fear more competitive utilization to arise, the analyst has no reason to assume that they are wrong.2 Now, both effects, the different incentive to search for patentable inventions and the different utilization of patented inventions, have to be analyzed and compared; and a meaningful comparison must be in terms of final product available to the nation.

263

264

In this mental experiment, one might to employ the technique of analysis developed in the preceding section-assume, first, that compulsory licensing is legally prescribed and, then, that it is abolished;2 the abolition is an extension of the degree of monopoly power of the patent owner. If a patent owner can no longer be compelled to license others, those who invest in industrial research, development, and innovation may anticipate higher returns and, hence, they may invest more money. The other steps of the analysis will be the same as in the earlier case, except for the last step, which previously related to one additional year of output restriction but must now refer to a difference in output restriction under existing patents of all "ages"; the restrictions associated either with exclusive exploitation by individual monopolists or with cartelized exploitation regulated by restrictive license agreements must be compared with the restrictions associated with less monopolistic exploitation by nonexclusive and, therefore, less restricted licensees. In the absence of more information than we have we cannot expect this type of analysis to yield immediately a solution of the controversial problem, but it may aid in locating the exact points of disagreement, and in identifying the criteria on which the solution will depend.

Entrepreneurs are not usually held to be pessimists. They are often described as overly optimistic; indeed, so much so that they virtually serve society for no compensation, speaking of the group as a whole. Pessimistic entrepreneurs would be expensive for society; the free-enterprise system rests largely on the optimism of private entrepreneurs.

The reactions of entrepreneurs to the introduction of a measure should be the reverse of their reactions to its abolition if a high degree of rationality prevails. The assumption of rational behavior, perhaps, idealizes the situation too much. If so, the argument will have to be qualified accordingly.

The argument sketched here was restricted to considerations of the comparative effectiveness of the system in stimulating invention and of the comparative rates of utilization of patented technology that has proven itself commercially successful. Thus, the argument did not extend to considerations of the comparative effectiveness of the system in stimulating innovation and of the comparative utilization of patented technology that has not yet proven itself commercially successful. Where there is still a long and difficult way from the patented invention to its first commercial application, where much investment at high risk is required before the invention can be reduced to practice, compulsory licensing may be a serious deterrent.265 No technique of analyzing this problem has been found thus far. There is not even the legal presumption concerning the (constitutional) validity of the objective: to stimulate, not invention, but innovating enterprise based on invention. Nor have economic theories been offered to show that innovation based on patentable and patented invention is in any respect preferable, from the point of view of economic welfare or progress, to other kinds of innovation. If the assumption of chronic stagnation and continuous deficiency of investment opportunities in a free competitive economy is rejected, one has to present reasons why investment should be channeled away from other outlets and toward innovating enterprise centered on patent protection. If the reasons for this redirection of investment are accepted, perhaps the underlying theories will suggest the type of analysis suitable to examine the positive and negative effects of various compulsory licensing schemes.

M. PROHIBITING OR PERMITTING RESTRICTIVE LICENSING

Perhaps one can come closer to an answer regarding the similarly controversial question of the admissibility or prohibition of restrictive licensing. It is often denied that restrictive licensing can increase the monopoly power of the patentee. 266 Under his exclusive right he may-in the United States-produce and sell as much or as little as he wants and may price his products as he pleases. If he agrees to license others under his patents under conditions which restrict the uses of his inventions, or the volume of output, the market outlets, and the selling prices, is he extending his monopoly or is he relaxing it by letting others share in the use of his inventions?

No general answer is possible. Just as cartels and other coordinated oligopolies are sometimes more restrictive, sometimes less restrictive than "perfect monopolies," the restricted sharing of exclusive patent rights may be more restrictive or less restrictive than their exploitation by a single patentee. Court cases involving various industries in the United States have shown the use of patent agreements as instruments of very tight output and price cartels, domestic or international; in these instances restrictive licensing has undoubtedly strengthened the monopoly power of patentees.267 This is par ticularly clear where different firms hold patents on substitute inven

265 Those who stress the need of protection of perfect exclusivity in order to attract the venture capital required for perfecting, adapting, and eventually applying a patented invention, implicitly admit that the invention as patented does not yet "work", or that the way it works it does not yet have “utility." 264 For example, George E. Folk, Patents and Industrial Progress (1942), pp. 12, 16.

267 Cf. Corwin D. Edwards, Economic and Political Aspects of International Cartels, Monograph No. 1, Subcommittee on War Mobilization of the Senate Committee on Military Affairs, 78th Cong., 2d sess. (1944).

tions and, without reciprocal licenses, might vigorously compete in the sale of their products. The situation is different where patents held by two or more firms cover complementary inventions, so that without cross-licensing none of the firms could produce efficiently. If firms refuse to license each other under patents on complementary inventions, or if firms refuse to license the owner of dependent patents, unless they are permitted to stipulate restrictions of use, output, markets, or prices, prohibition of restrictive licensing would interfere with efficient production 268-except if licensing in such cases were compulsory. In many countries this is accomplished by compelling the issuance of licenses to any applicant who can show that his own patent cannot be worked without permission to use an invention covered by another patent under which he wants to be licensed, and who is willing to grant a reciprocal license.269 Thus, the effects of outlawing restrictive licensing cannot be analyzed without considering, or making an assumption concerning, the status of patents which foreclose the use, or efficient use, of inventions patented by others.

Assuming then that licensing under such complementary and dependent patents is compulsory, the general prohibition of restrictive licensing would undoubtedly weaken the market control exercised by patentees who would agree on an amicable sharing of markets when they agree to the sharing of their inventions. Would this reduction of monopoly power substantially reduce the incentive effects of patents? To be sure, restrictive license agreements can increase considerably the profits of a patentee. But, much as this might affect the value of his patents, it would hardly be taken into account at the stage when he plans his investment outlays for industrial research and development work. The possibility of using patents as instruments of lawful collusion is in the nature of a windfall to the owner, and only rarely, or perhaps never, an effective anticipation for an investor in research and development directed toward eventually patentable inventions. At the time when a research project is formulated, neither the inventors nor the firm that finances them are likely to think of the restrictive license agreements that may be made under the hoped-for patents.270 The increased profits from the increased strength of his monopoly position are imputed not to future patents on future inventions, but rather to existing patents. But the value of existing patents is irrelevant for the problem of technological progress.271 What counts in this respect is the anticipation of profits from future patents, and these anticipations are unlikely to include the extra gains from making restrictive license agreements. Hence, whether such gains are actually possible or not possible depending on the permissibility or prohibition of restrictive licensing should make no difference for the incentive effects of the patent system.

This conclusion, if correct, has implications for patent law and policy. It strengthens the cases for forceful proceedings to remedy

This statement presupposes that the patents are valid; otherwise those who were denied a license may defy the patentee and win in the suit for infringement. The possibility of "inventing around" the patents does not contradict the statement in the text, because the waste involved in this unnecessary activity makes it equivalent to inefficient production.

Corwin D. Edwards, op. cit., supra, note 166, p. 242. Edwards recommends that such a provision "should be incorporated in American patent law." Ibid.

If restrictive licensing really figured so prominently in the thinking of a company, they probably have some existing patents to use as a frame for the arrangement. It could probably be shown that restrictive licensing is usually done under a whole series of patents.

The high value of existing patents may of course be a political-psychological aid in nurturing the anticipations that are supposed to be effective: the anticipated values of anticipated patents on anticipated inventions.